As phone and cable companies prepare for battle, IP keeps nipping at their heels

Vonage tanked after its IPO. It's not entirely clear anymore why eBay paid $2.6 billion for Skype (News - Alert). And the long-awaited rollout of advanced TV services based on Internet technologies has resembled the drip of a faucet.

It wasn't a banner year for some of the biggest names in Internet Protocol, the technical standard that makes the Web hum. But the technology itself continued to blossom, with newer innovations picking away at every corner of the telecommunications business, from voice to video to wireless.

No doubt the main event for 2007 will be the impending smack-down between the traditional phone and cable TV industries. The regional Bell companies, after losing millions of customers to rival phone services from cable providers in 2006, are just starting to ramp up their risky push into TV.

Verizon Communications Inc. expects its FiOS TV service will be available to 1 million homes by January. AT&T (News - Alert) Inc. finally appears to be pushing past technological holdups with U-verse, maintaining the IP-based service will be offered in parts of 15 markets by the close of December.

The competitive response couldn't come a minute too soon, as cable companies have had a field day in the phone business thus far. Just over 6 million homes will have switched to cable phone service by the end of 2006, a gain of 2.5 million for the year, the industry research company TeleGeography estimates.

In advance of the TV push, Verizon and AT&T have battled back with DSL Internet connections priced as low as $15 a month, hopeful of keeping and winning households that can be sold FiOS or U-verse later. The effort has borne some fruit: Although a rapid overall decline in residential phone lines continues, the percentage of remaining homes with phone and DSL service is growing fast, and the Bells are now signing up more first-time broadband users than their cable rivals.

As the giants of phone and cable do battle, however, both sides will find themselves flicking away at technological termites that threaten to hollow their victories by offering new ways to communicate and deliver content, always for less and sometimes for free.

Daily it seems, there's another renegade company launching some form of calling or video that bypasses the normal mode of consumption, usually by exploiting IP, a network language that reduces all forms of communication into simple building blocks of data, one indistinguishable from the next.

In the past month alone, a half dozen small companies have introduced applications and services to enable cell phone users to make cheaper wireless calls, many exploiting different elements of Voice over IP, or VoIP, the technology also being used by the cable companies and Vonage (News - Alert) Holdings Corp.

Some of the new services, with names like Talkster, Efonica's Mobilink, Jajah and iSkoot, mimic aspects of a long-distance calling card -- providing cheaper rates by first connecting with a local phone number -- while blending in new capabilities drawn from the world of instant messaging and Skype. Other startups such as Raketu are providing mobile VoIP calling by exploiting a phone's Internet connection rather than the regular voice channel.

By adding online buddy lists to the mobile mix, these services can enable a cell user to see whether friends are available before trying to call them, avoiding a waste of time and precious plan minutes. They also can enable quick-click dialing from one listing containing a friend's various phone numbers, Skype account or IM identity.

It's entirely possible, maybe probable, that all these newcomers will fail to catch on with enough people to ever resemble a real business.

To date, there's only been one Skype, which boasts 8 million simultaneous users at peak hours. And while Skype has only grown in popularity since being acquired last year by eBay (News - Alert) Inc. for a stunning $2.6 billion, it's not clear that success will ever produce pots of gold.

Yet collectively, Skype and all the would-be Skypes keep nibbling away at the core business model of the telecom industry, which treats a phone call and its length as something far more valuable than mere packets of data traversing a giant computer network.

Driving home the contrary point of view, Skype is now launching an unlimited calling plan for the United States and Canada costing just $30 a year. That's roughly the same amount charged every month by the Bells, cable providers, and even Vonage, whose stock has plunged more than 50 percent since its initial public offering in May, a stark sign of the competitive dangers investors see.

Meanwhile, with leading IM services playing up their own calling features, there's a growing critical mass of online users with an alternative way to speak without a regular phone. The big stumbling block here remains incompatibility between different IM providers. But should a few companies like AOL (News - Alert), ICQ, Skype and Yahoo ever decide to bridge their services, the size of the resulting user base would suddenly begin to approach the public phone network.

It's not that anyone foresees the imminent collapse of traditional phone and cable providers. To begin with, the upstarts often don't deliver the same level of reliability and sound quality as the mainstream offerings.

They all also rely in some fashion on high-speed Internet lines to deliver their services to end users. So while Skype phone traffic has continued to balloon, the vast majority of those calls are placed over DSL and cable broadband lines. Many are connected to traditional phone numbers, producing at least some revenue for the owners of those wires.

TeleGeography estimates that Skype users are on track to make over 27 billion minutes of computer-to-computer calls this year, with about half of them used for international long distance (all free). While that sounds like a lot, it still represents just 4.4 percent of total international traffic in 2006, up from 2.9 percent in 2005.

"Someday, all calls will be routed over the Internet," said Stephan Beckert, research director at TeleGeography. "But the numbers suggest that traditional international carriers aren't going to disappear anytime soon."

Another key factor working in favor of the establishment is convenience. Skype and other insurgents require users to jump through an extra hoop or two: installing additional equipment or software, punching in extra numbers or passwords, sitting at a computer, or maybe leaving your computer running at all times.

These requirements make them that much less easy to use than just picking up a phone or flipping on the TV.

Such simplicity and familiarity are the bread and butter on which big phone and cable companies are banking to make their investments in network upgrades and new services worthwhile. Even if their overall customer base shrinks, they expect to sell more to each household that stays.

Along the same lines, they too are exploiting IP technologies to introduce new capabilities and greater integration between home and mobile services. AT&T, for example, recently launched a video home surveillance system that can be monitored and controlled on the company's Cingular cell phones.

"Some customers are going to want to buy access from us (AT&T) and use other technologies because it gives them an interesting value proposition," AT&T Chief Financial Officer Rick Lindner said in an interview. "But for some customers, they're going to want the convenience of one provider.... That value proposition may not appeal to 100 percent of all people, but it will appeal to the majority."

Voice over IP (VoIP)

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A real-time communications system that converts voice into digital packets containing media and signaling data that travel over networks using Internet Protocol....more

Digital Subscriber Line (DSL)

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Frequency Division Multiplexing is used in wireline systems such as CATV-Community Antenna TeleVision and DSL-Digital Subscriber Line systems. This form of FDM is also called Broadband Multiplexing o...more

Internet Protocol (IP)

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IP stands for Internet Protocol, a data-networking protocol developed throughout the 1980s. It is the established standard protocol for transmitting and receiving data
in packets over the Internet. I...more